Rate cuts changed cash forecasts before capital access
As the ECB and Federal Reserve began easing policy, startups faced changes to deposit income, floating debt costs and investor discount rates. Each would reach the business through different mechanisms and timetables.
By 18 September 2024, both the European Central Bank and the US Federal Reserve had announced reductions in their policy rates. Their starting points and instruments differed. The ECB had begun in June and delivered a second deposit rate cut. The Fed's decision lowered its target range by half a percentage point, with implementation from the following day.
For a founder, a lower policy rate reached several parts of the business at different speeds. Cash balances could earn less, floating borrowing costs could fall and investors could reassess the value of future earnings. None of those mechanisms guaranteed a new loan or an equity financing. A cash forecast needed to reflect the company's own contracts and cash movements.
The ECB began easing cautiously
On 6 June, the ECB announced a 25 basis point reduction in each of its three key rates after nine months without a change. From 12 June, the deposit facility rate became 3.75%, the main refinancing operations rate 4.25% and the marginal lending facility rate 4.50%. These were annual policy rates on different central bank facilities, rather than rates offered directly to a startup.
The accompanying assessment was deliberately qualified. Inflation had fallen substantially, but domestic price pressures and wage growth remained strong. The ECB said it would keep policy sufficiently restrictive and decide meeting by meeting, without committing to a particular rate path. A budget based on an uninterrupted sequence of cuts would therefore have gone beyond the announced decision.
The second ECB cut also changed its operating framework
The 12 September decision reduced the deposit facility rate, which the ECB identified as the rate used to steer its policy stance, by another 25 basis points to 3.50%, effective 18 September. The main refinancing rate fell to 3.65% and the marginal lending rate to 3.90%. Their larger reductions incorporated an operating framework change previously announced in March.
| Period or category | % per year |
|---|---|
| Deposit · 12 June | |
| Deposit · 18 September | |
| Main refinancing · 12 June | |
| Main refinancing · 18 September | |
| Marginal lending · 12 June | |
| Marginal lending · 18 September |
ECB annual facility rates effective on the dates shown in 2024. Compare each facility with itself across dates. September's deposit cut was 0.25 percentage points; the other two reductions also incorporated the narrower operating spread. These are not customer loan rates.
That change narrowed the spread between the main refinancing rate and the deposit rate to 15 basis points. The gap between marginal lending and main refinancing remained 25 basis points. Reporting the 60 basis point reduction in the refinancing rate as the size of the policy easing would obscure this distinction. Treasury systems and financial commentary needed to name the rate being measured, including its effective date.
The Fed announced a target range
On 18 September, the Federal Open Market Committee announced a reduction of 50 basis points in the federal funds target range to 4.75–5.00%. Its implementation instructions applied from 19 September. The statement described greater confidence that inflation was moving sustainably toward 2%, alongside slower job gains and a higher, though still low, unemployment rate. Risks to the employment and inflation goals were judged roughly balanced.
This was a range for an overnight market rate. It was not the same instrument as the ECB's deposit facility rate, a quoted bank deposit yield or a venture debt coupon. Both central banks also continued reducing securities holdings under their respective arrangements. The decisions supported a change in the direction of policy, with a more complex financial environment than the phrase cheap money would suggest.
Cash income could respond before a loan payment
A startup holding cash in instruments that reset quickly could see its interest income decline as market rates adjusted. A fixed-term investment could retain its contracted return until maturity. On the liability side, a floating loan might reset at specified intervals and contain a benchmark floor, while a fixed-rate loan would usually retain its coupon. The timing difference could temporarily worsen cash flow even when the direction of policy was favourable to borrowers.
The practical model therefore needed separate schedules for deposits, investments and debt. It also needed to distinguish the benchmark from the lender's spread. A lower reference rate did not require a lender to offer new credit on unchanged terms, particularly when the borrower's cash position or revenue outlook had weakened.
Financial software had exposure on both sides
For a financial technology company earning income from customer balances, a declining rate could reduce gross revenue unless fees, volumes or the sharing of interest with customers changed. Another provider might benefit if cheaper funding improved its customers' capacity to transact. These effects depended on contracts and the duration of assets and liabilities, rather than simply the label fintech.
Software for treasury and finance teams could help by connecting rate assumptions to actual balances, maturity dates and reset clauses. A forecast with separate euro and dollar cash requirements was more useful than applying one global assumption for interest rates. Currency conversion and funding requirements could matter more than a small difference in quoted deposit yields.
An equity round still depended on the business
Lower discount rates can increase the present value assigned to future cash flows, all else equal. But investors also revise expectations for growth, margins and risk. The central banks' statements themselves contained reasons for caution: subdued activity in the euro area, continued domestic inflation pressures and changing US labour conditions. A rate reduction was not evidence that every software budget or industrial order book would strengthen.
A financing plan therefore needed an operating milestone that remained credible under several rate paths. For investors, the policy shift provided a reason to update assumptions, then test them against the company's revenue quality and funding needs. The most immediate consequence could be a revision to interest income. A more receptive market for a new equity round would require additional evidence.
Investment implications
- Compare the ECB deposit facility rate with the Fed's target range carefully: they are distinct policy instruments.
- The ECB's second refinancing rate reduction included a separate change in the operating framework.
- Lower deposit income and cheaper variable debt could arrive on different schedules, while access to new capital remained conditional.
Sources
- Monetary policy decisions, 6 June 2024 (opens in a new tab)
European Central Bank
- Monetary policy decisions, 12 September 2024 (opens in a new tab)
European Central Bank
- FOMC statement and Decisions Regarding Monetary Policy Implementation, 18 September 2024 (opens in a new tab)
Board of Governors of the Federal Reserve System
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